REVLON MANUFACTURING LTD v FC of T
Members:Beaumont J
Wilcox J
Tamberlin J
Tribunal:
Full Federal Court
Beaumont J
Introduction
This appeal raises questions concerning the computation of sale value of goods for the purposes of the sales tax legislation in a context where other services are provided for a separate fee.
The applicant, Revlon Manufacturing Limited (``RML''), carries on the business of selling cosmetics, fragrances and toiletry products by wholesale. Prior to 1975, RML sold goods by wholesale to its customers on a ``free into store'' basis; freight, insurance and administration formed part of the purchase price of the goods. But, in 1975, RML's system changed; thereafter, RML sold its goods on an ``ex-warehouse'' basis. At that time, an associated company, Revlon (Aust.) Services Pty. Ltd. (``RAS''), was established, offering a range of services, at the customer's option, including delivery of the goods, which were distributed from a central warehouse in Canberra operated by another related company, Korihor (No. 1) Pty. Limited (``Korihor''). During the assessment period, which was between 1 March 1984 and 31 May 1992, RAS charged customers a fee for its services; the fee was calculated by reference to the sale price. The commercial effect of the arrangement was that the customer continued to pay the Revlon Group the same amount as previously, when considered on a net basis. RML's invoiced cost of the goods was less than the former price although, as has been said, a service fee was payable to RAS. But, in the Commissioner's view, the fee ``include [ d] an over recovery of the actual costs (for the services rendered) incurred by... [ RAS]''.
In September 1992, following investigations, an assessment (``the assessment'') was made in relation to RML, purportedly under s. 25(2) of the Sales Tax Assessment Act (No. 1) 1930 (``the Act''), in the sum of $622,649. Additional tax in the sum of $249,060 was also assessed, purportedly under s. 46 of the Act. The figure in the assessment, altering the ``sale value'' of the goods, represented the difference between service fees charged by RAS and the amount of freight paid by RAS to freight contractors. The notice of the assessment, dated 4 September 1992, was, relevantly, in these terms:
--------
``Revlon Manufacturing Limited
...
SALES TAX ASSESSMENT ACT (NO. 1) 1930, AS AMENDED
You are hereby notified that you are liable to pay sales tax as shown
hereunder in accordance with an assessment that has been made under
the provisions of sub-section 25(2) of Sales Tax Assessment Act
(No. 1) 1930, as amended. (Emphasis added)
----------------------------------------------------------------------
Assessment under sub-section 25(2) of Sales Tax Assessment Act (No. 1)
1930, as amended (Emphasis added)
In respect of the alteration of the sale value of cosmetic and toiletry
goods sold during the period 1 March 1984 to 31 May 1992 inclusive.
Rate of Tax 20% 30% 32.5%
Sale Value $1,384,115 $985,267 $154,603
Sales Tax $ 276,823 $295,580 $ 50,246
Amount of Further Tax Payable: $622,649.00
Additional Tax Under Section 46 of Sales Tax Assessment
Act (No. 1) 1930, As Amended. (Emphasis added): $249,060.00
Total Amount Due under This Assessment: $871,709.00
...''
--------
The provisions of the legislation
The provisions of the Act which are immediately relevant should be mentioned by way of introduction; it will be necessary to refer to other aspects of the legislative scheme later.
Sales tax is intended to be self-assessing. But provision is made in ss. 25 and 46 for the possibility that, in certain circumstances, the Commissioner may need to make an assessment of tax, or penalty tax. An ``assessment'' is defined in s. 3(1) of the Act to mean -
- ``(a) the ascertainment of the sale value of goods and of the sales tax payable on that sale value; or
- (b) the ascertainment of additional tax payable under Part VIII.''
By s. 17(1) of the Act, sales tax is levied and paid upon the ``sale value'' of goods manufactured in Australia by a taxpayer and sold by him. By s. 18(1), with certain exceptions, where goods have been sold by a manufacturer to an unregistered person, the ``sale value'' of the goods in the case of a wholesale transaction, is ``the amount for which the goods were sold''.
Part V of the Act deals with returns. Sections 21 and 21A provide for returns by monthly and quarterly remitters respectively. In addition to these returns, the Commissioner may, under s. 22, call upon any person to furnish such return, or such further or fuller return, as the Commissioner requires.
Collection and recovery of tax is dealt with by Part VI of the Act. Subject, in particular, to s. 28 (whereby the Commissioner may, inter alia, grant an extension of time), a person who is a monthly remitter shall, by s. 24, pay sales tax (upon the sale value of the goods sold etc. during the month) within 21 days after the close of that month. Similar provision is made, by s. 24A, in the case of a quarterly remitter.
As has been seen, the notice of the assessment referred to ss. 25(2) and 46 of the Act.
Section 25 provides for the making of an assessment of tax, or of further tax, as follows:
``25(1) Where the Commissioner finds in any case that tax or further tax is payable by a person, the Commissioner may make an assessment in relation to the person. (Emphasis added)
25(2) Where, under sub-section 18(3A) or (4) or 18A(5) or (6), the sale value of any goods has been altered, the Commissioner shall make an assessment in relation to those goods. (Emphasis added)
[ Sections 18(3A) and (4) and s. 18A(5) and (6) empower the Commissioner, in some cases, and oblige the Commissioner in others, to alter the sale value of goods as returned in certain special cases. Although the Commissioner initially sought to rely upon these provisions, it was later accepted by the Commissioner that none of them were applicable.]
25(2A) Where -
- (a) a person makes default in furnishing a return;
- (b) the Commissioner is not satisfied with a return furnished by a person; or
- (c) the Commissioner has reason to believe or suspect that a person (although not having furnished a return) is liable to pay sales tax,
the Commissioner may determine an amount to be the amount upon which, in the opinion of the Commissioner, sales tax should be paid and may make an assessment in relation to the person.
...
25(3) As soon as conveniently may be after an assessment has been made, the Commissioner shall cause notice in writing of the assessment to be served on the person liable to pay the tax or further tax.
...
25(5) The omission to give any such notice shall not invalidate the assessment made by the Commissioner.''
ATC 4035
Section 46, which is in Part VIII, deals with Penalty (or additional) Tax; it provides as follows:
``46 Where, under sub-section 25(2), the Commissioner has made an assessment in relation to a person in consequence of an alteration of the sale value of goods (other than an alteration made under sub-section 18(3A)), the person is liable to pay additional tax, by way of penalty, equal to double the amount of the difference between the tax properly payable and the tax that would have been payable if the sale value concerned had not been altered.''
The history of the dispute
RML objected to the assessment, but the Commissioner decided to disallow the objection. Application was then made by RML to the Administrative Appeals Tribunal (``the Tribunal'') under the Taxation Administration Act 1953 to review the Commissioner's decision. The Tribunal decided that sales tax referable to the period prior to 4 September 1989 be remitted; but otherwise, the Commissioner's decision was affirmed. RML now appeals to this Court on a question of law under s. 44(1) of the Administrative Appeals Tribunal Act 1975.
In order to understand the issues which arise in the appeal, it will be necessary to describe the Commissioner's statement of his findings, by way of background, and then to outline the reasons given to the Tribunal for his decision.
The Commissioner's statement to the Tribunal of his findings and reasons for his decision disallowing RML's objection
In his statement to the Tribunal, dated 21 March 1994, the Commissioner noted, by way of background, RML's contentions that the fee paid to RAS should not form part of the selling price of RML's products; and that the fee charged was significantly less than it would have cost a customer to contract itself as an individual, with a carrier.
In stating the issues in dispute, the Commissioner said that he accepted that part of the fee payable to RAS ``relate
[
d] to allowable ex-warehouse freightage cost''. He referred to
Commonwealth Quarries (Footscray) Pty Ltd
v
FC of T
(1938) 4 ATD 477
;
(1938) 59 CLR 111
.
(In Commonwealth Quarries , it was held that, where the sale price of goods includes the cost of delivery, the sale value of the goods for the purposes of s. 18 of the Act is the price actually charged, including the cost of delivery. In a frequently cited passage, Dixon and McTiernan JJ. said (at ATD 482; CLR 121-122):
``But delivery is so essential to a sale of goods that it cannot be distinguished in this manner from the sale as a separate and independent act or service to which part of the consideration forming the selling price must be allocated. The place where the goods are or are to be when delivery is made is a matter which affects buyer and seller in fixing the price. But when the price is fixed, it is taken to be the amount for which the goods are sold whether the goods are already at that place or the seller to fulfil the contract must still carry them there. No doubt the parties to a sale of goods may by their contract distinguish between the price payable for the goods the property in which will pass on appropriation to the contract and the charges to be made by the seller for carrying the goods to some other place for delivery to or at the direction of the buyer. But this possibility does not justify a departure from the ordinary meaning of the words `amount for which the goods are sold' or from the natural application of that meaning to cases where goods are sold and delivered for one single consideration.''
)
However, the Commissioner went on to say that, in determining the ``proper'' sale value of the goods, he had increased ``the sale value'' by the ``margin of over recovery of cost by RAS'' because ``the agreement... between RML and RAS, particularly in relation to the over recovery of costs for the provision of services in connection with the relevant goods, was for... purposes that included securing a lesser sale value for the goods. (Sec. 18A(1)(vi)) [ sic] [ sc. s. 18A(1)(b)(vi)]''.
(By s. 18A(1), the sale value of goods, in the special cases there mentioned, is to be determined in the manner prescribed by that provision. In particular, s. 18A(1)(b)(vi) applies where an agreement is entered into for the purpose, or for purposes that included the purpose, of securing that the amount of the sale value of the goods would be less than the amount that could reasonably be expected to be the amount of their sale value if the agreement had not been entered into; and where valuable
ATC 4036
consideration has been given, directly or indirectly, by the purchaser to the manufacturer or another person for the provision of services in connection with the goods. The Commissioner now accepts that this provision was not applicable here.)In his findings, the Commissioner said that the distribution by RML of its finished goods to its customers was made through, and controlled from, its Canberra warehouse; the activities of the warehouse were controlled by Korihor which, acting as distributor for RML, had actively sought, and entered into, contracts for the freight of RML's products; although RAS appeared to have taken no active part in arranging the freight, the service fee was paid to it.
The sale value had been altered to reflect an increase ``equivalent to the over recovery of costs... [ but]... as the customer would incur cartage costs, actual cartage costs incurred and paid [ had] been excluded''.
In describing the evidence for his findings, the Commissioner referred to the absence from the financial statements of RAS of any reference to employee's expenses, e.g. annual leave etc., unlike other associated companies connected with the distribution of RML's goods, such as Korihor; although this was ``not conclusive of the fact [ that] RAS did not provide the services it contracted with the customers of RML there [ was] sufficient doubt raised... for the Commissioner to form [ the above] view''.
In giving his reasons for deciding to disallow the objection, the Commissioner said that he had ``long held the view [ that]... arrangements of the kind [ made] between RML and RAS attracted his intervention for the purposes of [ s.] 18A. Agreements were reached with the Cosmetic Industry [ including RML] in 1983 for the withdrawal of arrangements [ including] the over recovery of costs by service companies.... [ I]n altering the sale value under... [ s.] 18A(4) [ the Commissioner] is of the view that... as the customer would have incurred expenses for cartage only, in view of the ex-warehouse sales by RML, the sale value has been determined... [ as] that for which the goods could reasonably be expected to be sold by RML by wholesale [ as] if no agreement of the kind which allowed for over recovery of costs incurred had been entered into''.
(By s. 18A(4), it is provided that where the sale value is required to be determined in accordance with s. 18A, it is the amount for which the goods could reasonably be expected to have been sold by the manufacturer by wholesale if no agreement of a kind referred to in s. 18A(1)(b) had been entered into.)
The Tribunal's reasons
Before considering the validity of the assessment, the Tribunal, constituted by Mr. B.J. McMahon, Deputy President, made findings of the background facts as follows:
(a) Findings of fact
Notwithstanding that the contract with the freight contractors was made in the name of Korihor, invoices for the ``freight element'' of the consideration were sent to customers in the name of RAS. Negotiations with the two freight forwarders were carried out by RML. One contractor provided parcel delivery services for cosmetics and fragrances. The other arranged bulk haulage for toiletries.
Under the terms of RML's invoice, property in the goods passed to the customer when the goods were loaded on to the vehicle at the Canberra warehouse.
RAS offered customers trading terms expressed as follows:
``1 In consideration of a service fee [ RAS] shall... provide the service to the customer in respect of the goods purchased from [ RML].
2 `The service' when used in these conditions of service comprise at the customer's option -
- (a) on the customer's behalf taking possession of the goods sold to the customer by [ RML]
- (b) on the customer's behalf insurance of the goods from the moment property in the goods passes to the customer until they reach the customer's premises; and
- (c) delivery of the goods to the customer or as the customer directs.
3 If any of the goods are returned to [ RML] with the authorisation of [ RML] [ RAS] agrees to credit the customer with the amount of the service fee charged in respect of those goods.
ATC 4037
4 Payment of service fee shall be made within 30 days and cheques made payable to [ name of group].
5 Irrespective of any terms and or conditions of service contained in a customer's order form acceptance (by retaining the goods or any other method) of the goods ordered will be conclusive acceptance of the terms and conditions of service.''
Customers who requested RAS to act were given an invoice in three parts: (1) RML's statement itemising the goods and their price inclusive of sales tax; (2) RAS's statement showing the service fee; and (3) a remittance advice for the cumulative total.
Between 1 March 1984 and 30 June 1985, RAS's fee was 2 per cent of the selling price of the goods; from 1 July 1985, it was increased to 2.8 per cent; but from 31 August 1990, it reverted to 2 per cent. These fees were set in anticipation of at least recouping the estimated delivery costs, but did not necessarily reflect the actual cost of delivery in any particular instance. The fee was not, as has been seen, calculated by reference to weight or distance. As a uniform percentage rate, the fee would be known to the customer. There was evidence from RML's management to the effect that any other basis for calculation of the fee would be ``disproportionately complex''.
The Tribunal said:
``19. Throughout the assessment period it was a term and condition of [ RAS's] trading terms that that company would refund customers the delivery fee charged for goods which were subsequently returned by them with the authorisation of [ RML]. In these circumstances it was proposed that [ RAS] would bear the costs of the cartage fees incurred. In practice, however, [ RAS] made neither a profit nor a loss. It had no staff or premises. No insurance policy was issued in its own name. It did have a bank account and financial transactions between that company and [ RML] were by exchange of cheques. It was also the aim to make [ Korihor] a break even company. When goods were returned, the customer received a credit for freight directly from the [ RML], even though the goods has been sold FOB. There appears to have been no continuing relationship between [ RAS] and the customer once the tripartite invoice in the name of [ RAS] had been sent to the customer. All subsequent arrangements were between [ RML] and the customer. This pattern governed not only the provision of freight but also the arrangements for insurance.''
Although RAS offered to arrange insurance, in fact the only insurance available was cover under a worldwide marine policy effected by RML's American parent company. That policy was subject to an excess of US$1,000. The Tribunal said:
``20.... Notwithstanding the fact that [ RAS] arranges insurance through [ RML's] umbrella policy, claims under the policy are made directly against [ RML] and credits are arranged directly between [ RML] and its customers. Returns of goods were taken up by [ RML] as a debit against sales as if [ RAS] did not exist. There were no discussions with the customer concerning insurance and the customers were not advised of the identity of the insurer. Because the umbrella policy covered many risks it was not possible for [ RAS] to obtain from the underwriters a figure covering transit insurance alone. This is the reason why insurance was treated as a hidden overhead in calculation of the service fee. Declarations were sent regularly to the insurance company's Australian representative which simply showed sales values. Premiums were calculated on the basis of these values. The Australian representative was not told in relation to each shipment who were the consignees or where the goods were to be sent.
21. The evidence was that if [ RML's] umbrella insurance cover was not provided for customers, the cost of effecting separate insurance in relation to each delivery would be high. In the assessment period, the principal parcel freight forwarder charged 1.25 per cent on the value of goods for normal freight, excluding glass and fragile goods, and 6 or 7 per cent on the value of goods where there was no exclusion for glass or fragile goods.''
It appears that no customer ever exercised the option of collecting goods from the Canberra warehouse, notwithstanding that, from a commercial point of view, all goods were sold in the ordinary course of business to unrelated customers.
ATC 4038
The Tribunal went on to say:
``The group made a profit from the service charge because (it was said) it was efficient at arranging freight and insurance systematically for all or most of its customers in a coordinated, cheaper and more efficient way than could be achieved under any alternative method. Nevertheless it was agreed that most of the dollars of profit referred to in the assessment... resulted from the period when the higher service fee of 2.8 per cent was being charged. The acknowledgment by [ RML] that a profit was made from the service fees and the reasons submitted for appropriateness of that profit are difficult to reconcile with other evidence, namely, that the service fee was set at a level sufficient to cover the outgoings to which it referred and no more. By and large the service fee, when at the lower level, resulted in a loss on bulk freight and a profit on parcels. The evidence indicates to me however that such a loss or profit occurred by chance. The service fee appears to have been calculated without reference in individual cases to the costs of bulk freight or parcel freight. If profits or losses resulted they were not directly referable to the level of service fee charged.''
(b) The validity of the assessment
The Tribunal said that an ``assessment'' was a ``process of ratiocination'' and that the notice of assessment was the document ``bringing to an end the process of assessment''. Noting that the references in the document to ss. 25(2) and 46 of the Act had raised questions as to the validity of the assessment, the Tribunal considered its validity in terms of the operation of ss. 18A(4) and 18A(8) in particular.
(It will be recalled that by s. 18A(4) it is provided that the sale value required to be determined in accordance with s. 18A is -
``... the amount for which the goods could reasonably be expected to have been sold by the manufacturer by wholesale if no agreement of a kind referred to in paragraph (1)(b) had been entered into....''
By s. 18A(8) it is provided that, for the purposes of that section, an agreement shall be taken to have been entered into for a particular purpose if any of its parties had that purpose.)
The Tribunal was satisfied that the agreements between RML and the retail purchasers were entered into by RML for a purpose that included the purpose of securing that the amount of the sale value of the relevant goods would be less than the amount that could reasonably be expected to be the amount of their sale value if the agreement had not been entered into, whether or not the purchasers had that purpose.
The Tribunal said:
``I find that [ RML] had the purpose on the basis of evidence that was given to me that the structure was adopted after advice from sales tax experts, and that the service fees were charged according to rates recommended by those experts from time to time. Indeed the General Manager, Finance and Administration of [ RML] clearly agreed in cross-examination that one of the general purposes of the arrangement was to reduce the overall burden of sales tax.''
The Tribunal went on to say:
``28. It was submitted for [ RML] that the purpose was no more than to avoid sales tax on the value of services provided and that [ RML] was doing no more than taking advantage of the options discussed in Commonwealth Quarries (Footscray) Pty Ltd v The Federal Commissioner of Taxation 59 CLR 111 and applied, for example, in Case Z29 , 92 ATC 267.''
(In
Case
Z29,
92 ATC 267
the taxpayer was an importer and wholesaler of electrical goods. It offered retailers, at their option, an extended warranty in the form of a ``protection plan'', for which a separate prepayment was required. It was held that since the acquisition by a retailer of the plan was not an essential characteristic of the sale, it was not part of the consideration for the buyer to get title to the appliance.)
But the Tribunal said:
``Whether or not there was such a purpose the fact is, and I so find, that [ RML] also had a purpose falling within the terms of s. 18A(1)(b).... Accordingly the sale value of the goods is to be determined in accordance with s. 18A rather than in accordance with s. 18.''
The Tribunal held that it was not necessary that the s. 18A(1)(b) purpose be the dominant one. It also held that, since the parties to the sale agreement were at arm's length, the
ATC 4039
provisions of s. 18A(6) could not apply. It followed, the Tribunal concluded, that the sale value was that required under s. 18A(4). However, the Tribunal went on to say:``33. If the assessment were made under sub-section 25(2) it could only have been as a result of an alteration of value under sub- section (6). As I have held that that sub- section is not available to the Commissioner on the evidence before me, then either the assessment was made under sub-section 25(1) or if made under sub-section 25(2) was invalid.''
The Tribunal noted RML's contention that the Commissioner was given separate powers to assess under ss. 25(1), 25(2) and 25(2A), but having assessed under s. 25(2), he could not support his assessment under another head of power. For his part, the Commissioner relied upon the provisions of s. 67(1) of the Act as follows:
``67(1) The mere production of -
- (a) a notice of an assessment or of the making of a refund decision; or
- (b) a document signed by the Commissioner, a Second Commissioner or a Deputy Commissioner and purporting to be a copy of a notice of an assessment or of the making of a refund decision,
is conclusive evidence -
- (c) of the due making of the assessment or the refund decision;
- (d) in the case of a notice of an assessment - except in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or an appeal relating to the assessment, that the amounts and all of the particulars of the assessment are correct...''
Rejecting RML's argument, the Tribunal held that a notice of assessment was a ``bare bones document'' containing essential material, viz., the amounts of the sales value and of the tax; it followed that the references to the assumed bases upon which the assessments of tax, and additional tax, were raised, were ``mere surplusage'' and did not detract from the essential validity of the assessments, notwithstanding that some of the ATO officers ``may have thought that they were relying on certain sections of the... Act to justify their process of assessment and the subsequent notice''. The Tribunal held that because of the provisions of s. 67, the notice of assessment ``speaks for itself, whatever the views of those who were previously involved in its authorship''. It followed that the ``due making'' of the assessment had been ``conclusively proven'' but the question remained whether it was ``excessive''.
(c) The application of s. 12B(1) of the Sales Tax Procedure Act 1934
By s. 12B(1) it is provided, relevantly, that where tax in respect of any transaction in relation to any goods has not been paid at the expiration of a period of three years from the close of the month in which the transaction was effected -
``... the Commissioner may remit that tax unless he -
- (c) has required payment of the tax prior to the expiration of that period; or
- (d) is satisfied that the payment of the tax was avoided by fraud or evasion.''
The Commissioner relied, in this connection, upon two letters to RML dated 6 March 1987 and 19 December 1990. It is sufficient to refer to the later one as follows:
``SALES TAX
Information held in this Office discloses an underpayment of sales tax. For this reason, you are hereby required to furnish further or fuller returns and pay tax upon the sale value of cosmetics: -
- (a) manufactured by the business; and
- (i) sold;
- (ii) treated as stock for sale by retail;
- (iii) applied to own use.
- (b) purchased free of tax by quotation of certificate; and
- (i) sold;
- (ii) applied to own use.
- (c) imported free of tax by quotation of certificate; and
- (i) sold
- (ii) applied to own use;
during the period December 1987 to December 1990. This should now be done.
It is pointed out that the Sales Tax Assessment Acts require a taxpayer to furnish a return and pay the tax payable under those acts within twenty-one days of
ATC 4040
the close of any month in which taxable transactions occur. For the purpose of this adjustment it will be satisfactory, however, if one return covering these transactions is furnished. A blank sales tax return is enclosed.Section 12B of the Sales Tax Procedure Act authorizes the Commissioner to remit arrears of sales tax which is unpaid after the expiration of three years from the close of the month in which the taxable transactions, act or operation was effected unless -
- (a) he has required payment of the tax within the three years specified; or
- (b) he is satisfied that the payment of the tax was avoided by fraud or evasion.''
As has been seen, this letter referred to the period December 1987 to December 1990. The earlier letter mentioned the period 1 March 1984 to 31 January 1987, so that even if both letters were valid, there was a gap between February and November 1987.
By s. 12B(3) it is provided that, for the purposes of the section, the Commissioner shall be deemed to have required payment of the tax if he has served a notice ``specifying that an amount of tax is payable by that person in respect of... the transaction....''
The Tribunal held that, in order to ``specify'' that ``an amount of tax is payable'' within the meaning of s. 12B(3), some degree of certainty was required. It was not sufficient that the taxpayer knows the quantity and invoice price of the goods. The requirement of reasonable certainty could not be satisfied until the Commissioner had indicated to the taxpayer what he ``intended to find as the true sale value''. Since the letters gave no such indication, it followed that the Commissioner was under an obligation to remit sales tax, assessed in respect of any period prior to 4 September 1989, if it formed part of the tax referred to in the notice of assessment.
(d) The sale value
Consistently with his assessment, the Commissioner accepted that RML should be allowed to deduct from the gross amount paid to the Revlon Group (i.e. including the service fee) the amounts which had been paid to the freight contractors by RAS. For its part, RML contended that further deductions should be allowed representing the cost to RAS of insurance premiums, administration and other overhead costs.
The Tribunal said:
``52.... In my view, [ RML] has not discharged its onus of proof of showing that the sales value is excessive in those respects. No evidence was offered concerning the amount of insurance premium paid to cover transit risks. I find it hard to accept that this could not have been separated out by the underwriter. It certainly could have been dealt with separately by [ RAS]. Similarly no satisfactory accounting was kept of overheads, perhaps for a simple reason. The evidence showed that although [ RAS] had separate functions to perform in the overall distribution of the goods, these services in fact were carried out, by and large, by [ RML]. The actions of the parties were not in accordance with their documentation, a situation which has been observed to exist on many occasions (see, for example, Albion Hotel Pty Limited v The Commissioner of Taxation 115 CLR 78 at 92).
53. I am not satisfied that the service fees should be totally chargeable to the costs of distribution. The rate of fees appears to have been arrived at after consultation with sales tax advisors and not after an assessment of those distribution expenses. The fact that the service fee is expressed as a percentage of sales is, to my mind, evidence of the fact that it is unrelated to the actual costs of distribution, except coincidentally when dollar sums calculated by reference to the service fee are compared with selected dollar sums chargeable for freight. Certainly during the period when the service fees rose to 2.8 per cent and stayed at that level for some years before returning to 2 per cent, the service fees were calculated with even less reference to actual costs. The fees rose and fell almost entirely because of avoidance of sales tax considerations.''
(e) Additional tax
The Tribunal concluded that additional tax was payable by virtue of the operation of s. 45(2) of the Act. Relevantly, it provides for a liability to pay, by way of penalty, additional tax where (a) the taxpayer ``makes a statement to a taxation officer... that is false or misleading in a material particular''; and (b) the tax properly payable exceeds the tax that would
ATC 4041
have been payable if assessed on the basis that the statement were not false or misleading. The additional tax is an amount equal to double the amount of the excess.The Tribunal held that, for the purposes of s. 45(2), the false statement consisted of the attribution of false sale values to the goods.
The Tribunal noted that its review jurisdiction in this area conferred by Part IVC of the Taxation Administration Act was limited by s. 14ZT(1)(b) of that Act. It provides that an objection decision is an ``ineligible sales tax remission decision'' if it relates to the remission of additional tax under s. 45(2) of the Act because of a false or misleading statement, except where the additional tax payable exceeds the amount calculated, in respect of the period commencing on the day the amount of the excess referred to in s. 45(2) became due and payable, and ending on the day on which the assessment of additional tax is made at the rate of 20 per cent per year of that excess. The Tribunal further noted that additional taxation was levied at the rate of 40 per cent, but covered an assessment period of more than eight years. The Tribunal held that, effectively, additional tax was less than 20 per cent per annum; it followed that s. 14ZT(1)(b) precluded review.
(f) The Tribunal's decision
In the result, the Tribunal varied the objection decision by remitting sales tax referable to the period prior to 4 September 1989; otherwise the decision was affirmed.
RML's grounds of appeal
RML now challenges the Tribunal's conclusions that the assessment of primary tax could be supported as effective under ss. 25(1) and 45; and the finding that RML had made any relevant false or misleading statement for the purposes of s. 45(2). RML further says, in particular, that the Tribunal ought to have held (in the sense that no other finding was open) that the purposes of RML and RAS were of a normal commercial character and were not of the kind described in s. 18A(1)(b). RML also contends that the amount for which the goods would reasonably be expected to have been sold, if no agreement of the kind in s. 18A(1)(b) had been made, was an amount no greater than the price for which the goods were actually sold, being the amount in respect of which sales tax had been paid. RML then says that the Tribunal should have found that the service fees were reasonable having regard to the identifiable costs actually incurred, the unquantified yet substantial costs of administering and meeting claims for goods lost or damaged in transit, relevant overheads and the charges that would otherwise have been payable by customers to independent freight forwarders and insurers.
The Commissioner's cross-appeal
The Commissioner now challenges the Tribunal's finding that neither of his letters constituted a requirement to pay tax for the purposes of s. 12B(1)(c) of the Sales Tax Procedure Act .
Conclusions on RML's appeal
It will be convenient to consider first the possible applications here of s. 18(1)(a), the general provision dealing with sale value of goods; and then to turn to the possible application of s.18A, dealing with sale value in special cases.
(a) Section 18(1)(a) - The general principles
The general principles to be applied under the Act are settled. One commentator has described them as follows:
``Broadly, the aim of the sales tax law is that sales tax is payable on a fair and reasonable wholesale value. Since most of the transactions subject to sales tax are wholesale sales, the sale value usually is the actual amount for which the goods are sold... [ But] [ t]here are many notional and applied sale values throughout the sales tax legislation to take into account unusual or particular situation liabilities....''
(David R. Vos, Australian Sales Tax Law and Practice , D.G. Hill and S. Economides (Ed) at 150).
The broad aim of the law is reflected in the statement of Windeyer J. in
E.M.I. (Australia) Ltd.
v
FC of T
71 ATC 4112
(at 4118);
(1971) 45 ALJR 349
(at 353)
that
-
``The word `amount' of itself connotes a sum total to which items amount up... as used in the Assessment Act , `the amount' for which a thing is sold means... the sum total of all moneys that the buyer promises, expressly or tacitly, to pay to, or for, the seller in order that he, the buyer, may get a good title to goods that he has agreed to buy.''
(Emphasis added)
ATC 4042
Windeyer J., noting the reference by Dixon and McTiernan JJ. in Commonwealth Quarries to ``the contract price'' as the amount for which the goods are sold, went on to say (ibid):
``It may be that in some agreements for sale the buyer agrees to meet some incidental charges that are not in a strict sense part of the contract price. But the judgments [ in Commonwealth Quarries ] support, I think, my view of the content of the word `amount'....''
With respect, I agree. Such an expanded approach is consistent with the statutory objective of ascertaining a fair and reasonable price for the goods (see, e.g., s. 18(1)(b); s. 18(2)). That is to say, s. 18(1)(a) calls for a broad, rather than a narrow, inquiry which takes into account the substance of the transaction or dealing, as well as its form. See, generally, the discussion in
Queensland Independent Wholesalers Ltd.
v
FC of T
91 ATC 4492
at 4497-4498;
(1991) 29 FCR 312
at 319-321
. As Hill J. there observed (at 4498; 321)
-
``The amount for which goods are sold will be a question of fact to be determined in each case.... [ I]t will usually be the contractual purchase price arrived at between seller and buyer. However, this will not invariably be so.''
Although the question may be one of fact, the determination of that question must be made in the light of the disclosed intention of the legislation that goods be ``taxed at their
full
wholesale value'' (see
Brayson Motors Pty Ltd
v
FC of T
85 ATC 4125
at 4127;
(1984-1985) 156 CLR 651
at 657
. (Emphasis added)
(b) Section 18(1)(a) - The application of the general principles in this case
As has been noted, in its statement to the Tribunal, the Commissioner appears to have relied on s. 18A, specifically s. 18A(1)(b)(vi), rather than invoke the general provisions of s. 18(1)(a). The reports of general internal departmental audits carried out are consistent with this approach. An ``audit bulletin'' recorded the following:
``4. SALE VALUE:
Sale Values Adopted: (Pls indicate the SV adopted & on what basis)
Sec. 18(1)(b)(i) -
Sale value adopted by Revlon Manufacturing Limited is the tax exclusive wholesale selling price.
Sec. 18A
As already detailed associated company, Revlon Services Pty Ltd, undertakes provision of service to customers in respect of handling and delivery of goods.
Such charge is not subject to payment of sales Tax.
Sale Value Alterations: (Pls indicate areas where SV found to be inadequate and the basis for alteration)
The sale value of goods sold by Revlon Manufacturing Limited was altered under the provisions of Section 18A to the extent of overrecovery of actual delivery costs incurred by the associated Service Company.''
An ``audit report'' stated the following:
``All finished goods distribution activities are centrally controlled from the company's Canberra warehouse which also issues computerised sales invoices upon the picking of goods for delivery. Sales are made on an ex-warehouse basis.
The taxpayer also operates service companies to carry out distribution of goods for a service fee, viz. `Revlon (Aust.) Services Pty. Limited', and `Max Factor Services Pty. Limited' Also `Korihor (No. 1) Pty Limited' operates the Canberra warehouse distribution function with its income derived from those operations.
The issue of freight was previously the subject of an Assessment Notice sent to the taxpayer on 27 September, 1982. An Objection to this Assessment Notice was received by the ATO on 29 November 1982. However, such matter was subsequently finalised as part of the overall service company arrangements within the cosmetic industry.
...
Section 12B Notices were issued by Sydney Office in 1987 on the matters relating to... the exclusion of freight from the taxable sale value...''
ATC 4043
As has been seen, the Tribunal also appears to have confined its attention to s. 18A, rather than s. 18.
Moreover, no attempt was made in the argument presented to us on behalf of the Commissioner, to rely upon s. 18. Again, the Commissioner relied upon s. 18A. Strictly speaking then, it is not necessary for us to consider, at least directly or specifically, whether s. 18(1)(a) could be applied here.
(c) Section 18A(1)(b)(vi) and s. 18A(4) - The general principles
It will be recalled that s. 18A, which was inserted as an anti-tax avoidance provision in 1978, provides for the determination of sale value in special cases. Relevantly, s. 18A(1)(b)(vi) applies where under an agreement entered into for the purpose, or purposes that included the purpose, of securing that the amount of the sale value would be less than the amount that could reasonably be expected to be the amount of the sale value if the agreement had not been entered into, valuable consideration has been given in the provision of, or procuring the provision of, services in connection with the goods. As Hill J. noted in
Copperart Pty. Ltd.
v
FC of T
93 ATC 4779
at 4796;
(1993) 26 ATR 327
(at 346)
, the mischief which s. 18A (and equivalent provisions) was designed to combat was, relevantly, described in the explanatory memorandum. Under the heading ``Service Charges'' the following was stated (at pp. 5-6):
``These amendments are designed to counter tax avoidance schemes involving agreements under which the vendor sells goods at a price below their true wholesale value under an arrangement whereby another person (usually an associated company) receives an additional amount from the purchaser which is ostensibly for the provision of services in connection with the goods. The total of the two amounts represents the normal wholesale price of the goods. Amounts paid for services are not subject to tax and, under the particular arrangements, this amount is inflated while the price charge for the goods on which tax is payable is reduced accordingly.
The amendments will mean that where agreements of this type are entered into for the purpose of avoiding tax by reducing the sale value of goods, the sale value will be the fair and reasonable wholesale selling price of the goods.''
The memorandum went on to state (at 24-25):
``Arrangements at which the amendments are directed assume a variety of forms. A common element is that goods are sold for amounts substantially below their true wholesale selling price with a reduction in the selling price being made up by a separate charge. The person liable to pay sales tax on the transaction claims that the separate charge is not subject to sales tax and that the sale value of the goods for sales tax purposes is the substantially reduced price for which the goods are sold. The goods would not, of course, have been sold for anything like the reduced price were it not for the collateral arrangement under which the separate charge is paid. The total of the two amounts represents the normal wholesale price of the goods.
These separate charges are usually of two kinds. Either there is a charge in connection with the granting, exercise or assignment of an option to purchase the goods, or a charge for services in connection with the goods that is out of all proportion to the value of the services to be rendered.''
As Hill J. pointed out in Copperart (at ATC 4796; ATR 347), the statutory definition of ``agreement'' in this context is wide. By s. 18A(10), it encompasses arrangements or understandings which may be informal, or implied, and not intended to be enforceable. Moreover, as has been noted, it is provided by s. 18A(8) that, for present purposes, it is sufficient if any of the parties entered into the ``agreement'' for the prescribed purpose, or for purposes that included that purpose.
Section 18A(1)(b) has dual aspects, one subjective, the other objective. I agree with Hill J.'s observation in Copperart (at ATC 4796-4797; ATR 347) that the purposive element must be found to exist in a subjective sense; so that at least one of the parties must in fact have that purpose. On the other hand, the purpose itself has an objective ingredient. A comparison, necessarily hypothetical, is required between the nominal, that is, apparent actual sale value and the amount, objectively ascertained, that could, in truth, reasonably be
ATC 4044
expected to be the amount of the sale value if the ``agreement'' had not been entered into.Section 18A(4) also contemplates an objective exercise. Here the inquiry, again hypothetical, is as to the amount for which the goods could reasonably be expected to have been sold if no ``agreement'' of the prescribed kind had been entered into (see the discussion by Rick Asquini: Australian Sales Tax Law and Practice at 195).
(d) The possible application of s. 18A here
It follows, in my view, that the Tribunal was required to address the foregoing questions in the present context. It will be convenient to take them in turn.
First, did any of the parties have the requisite purpose? As has been noted, the Tribunal said that RML had that purpose ``on the basis of evidence... that the structure was adopted after advice from sales tax experts... [ and testimony from one of its General Managers] that one of the general purposes of the arrangement was to reduce the overall burden of sales tax''. But, as has been seen, the Tribunal went on to say that it was not to the point to consider whether RML had the purpose of avoiding sales tax on the value of services provided by utilising the option raised in Commonwealth Quarries and Case Z29 .
I have difficulty in accepting this approach. It is true that one aspect of s. 18A(1)(b)(vi) is subjective, in that one party at least must have the prescribed purpose. But, as has been mentioned, the objective question remains: was the purpose that of securing that the amount of the sale value was less than could be expected? It is also true, as the Tribunal said, that the Act contemplates the possibility of more than one purpose. But the evidence relied upon by the Tribunal in support of its conclusion did not, in my view, justify the inference that the Tribunal purported to draw. Even if RML sought tax advice with a view to reducing its tax burden, it does not follow that it had the prescribed purpose. If, as RML contended, it acted with a view to avoiding sales tax on the services where it could legitimately do so, such a purpose would, ordinarily, be inconsistent with RML's having the prescribed purpose as well. As has been noted, the Tribunal was of the view that it need not pursue that question. But, in my view, it needed to do so in order to address the legal question posed by s. 18A(1)(b)(vi) in all its aspects, particularly the objective aspect mentioned, that is the amount that could reasonably be expected to be the sale value. In undertaking that exercise, the expanded meaning attributed to the word ``amount'' in EMI should, in my view, be applied in the present context also.
Further, if the prescribed purpose be found to exist, the additional objective exercise in evaluation required by s. 18A(4) must be undertaken. In a similar context, Burchett J. described the ``fictional'' exercise as a ``question involving a very flexible discretion'' (see
Estee Lauder Pty Ltd
v
FC of T
88 ATC 4412
at 4420;
(1988) 80 ALR 314
at 324
). Burchett J. went on to say (at ATC 4421; ALR 325) that:
``What would be expected is not a test measured by a ruler; it requires an exercise in judgment, as was made clear in... [ Crown Bedding Co. Ltd. v Inland Revenue Commissioners [ 1946] 1 All ER 452 at 457].''
In the Crown Bedding Case, Lord Greene M.R. said (at 457):
``The Commissioners had to decide whether that was a benefit in the first place which might have been expected to accrue, and they clearly came to the opinion that it was. In my view, on the evidence and on the true construction of these words, they were perfectly entitled to do so. I cannot find that they in any way misdirected themselves as to what this language means. They found that there was a benefit and that that benefit would result, in certain events, in the avoidance or reduction of liability to excess profits tax. Whether those events were probable or whether they were possible does not seem to me to decide the case at all. If the Commissioners in considering the possibility of benefit came to the conclusion that to the mind of a reasonable man that benefit was so remote and so unlikely as not to be worth considering, they would naturally put it out of consideration. On the other hand, once the possibility moves up the scale and advances in the direction of a probability, it seems to me there is a wide area within which they, as judges of fact and of matters of degree, are entitled to form a conclusive opinion. That is what they did in the present case.''
Although a matter of evaluation, the subject of the evaluation exercise is the actual
ATC 4045
``amount'' (in the expanded sense described in EMI ) of the sale value which could reasonably be expected to be negotiated, hypothetically, between RML and its retail customer. An analogy may be found for this purpose in the familiar observations of Griffith C.J. inSpencer v The Commonwealth (1907) 5 CLR 418 (at 432) :
``In my judgment the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, i.e., whether there was in fact on that day a willing buyer, but by inquiring `What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?' It is, no doubt, very difficult to answer such a question, and any answer must be to some extent conjectural. The necessary mental process is to put yourself as far as possible in the position of persons conversant with the subject at the relevant time, and from that point of view to ascertain what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together.''
Such an approach is, in my opinion, consistent with the general objective of the Act, already mentioned, that sales tax be paid on a fair and reasonable value.
But, as the Tribunal noted, the Commissioner's assessment, which was upheld by the Tribunal, was made on a ``mathematical basis''. With respect, I cannot agree that, in law, this is the correct approach. The question of law to be addressed under s. 18A(4), on the hypothesis there stated, is to be considered between seller and buyer in terms of what ``amount'' they could reasonably be expected to agree as the sale value of the goods. That is an evaluation involving a judgment, rather than a mathematical exercise of the kind undertaken here by the Commissioner and adopted as appropriate by the Tribunal.
For these reasons, subject to what follows, I would propose that the appeal be allowed; that the Tribunal's decision be set aside; and that the matter be remitted to the Tribunal for reconsideration in accordance with these reasons.
(e) RML's challenge to the validity of the notice of assessment
Apart from the merits, as has been said, RML also challenged the notice of assessment on technical grounds, contending that it was not open to the Commissioner to rely upon s. 25(1) or s. 45(2) since the notice of assessment referred to different provisions, viz. s. 25(2) and s. 46. Reliance is placed, in particular, upon the observations of Kitto J. in
FC of T
v
Wade
(1951) 9 ATD 337
at 344;
(1951) 84 CLR 105
(at 116)
and other income tax cases; and, in a sales tax context, on the decision of the Full Federal Court in
Magna Stic Magnetic Signs Pty Ltd
&
Anor
v
FC of T
91 ATC 4216
at 4225;
(1991) 28 FCR 39
(at 52)
.
I have difficulty accepting RML's argument.
As Wilcox J. pointed out in argument, there are significant differences between the language used in s. 25(1) and that used in s. 25(2): the former is framed as a power, whereas the latter is framed as a duty. This is consistent with the approach that, in the usual regime of self- assessment, the Commissioner should only need to intervene exceptionally by making an assessment; and that where it is appropriate that an assessment should be made in the special circumstances contemplated in s. 18(3A) or (4) or in s. 18A(5) or (6), then the Commissioner is bound to make such a special assessment.
In Magna Stic , above, Beaumont and O'Loughlin JJ. said (at ATC 4225; FCR 52):
``A purported requirement of the payment of the tax which is substantially accurate, where the mistake was evident and could be safely ignored and corrected by the recipient may yet be a valid requirement for the purposes of s. 12B(1)(c) (see, e.g. Wingadee Shire Council v. Willis (1910) 11 C.L.R. 123 per Isaacs J. at p. 144). Errors of this kind are not fatal to the rights of the Commissioner (see the Wingadee case per Higgins J. at p. 148). In such cases, it is proper to apply the maxim `falsa demonstratio non nocet'. But can it be said that the demand now relied upon substantially complies with the requirements of s. 12B(1)(c)? Was the mistake evident so that it could be safely ignored and corrected by the recipient?
ATC 4046
In our opinion, it is not possible, as a matter of form or substance, to characterise the assessment issued to Products on 18 February 1987 as a requirement for the payment of the tax for which it was liable under the (No. 2) Act . The notice referred to the (No. 1) Act and asserted that Products had manufactured the goods. The notice purported to allow Products a credit for tax assessed to Signs under the (No. 1) Act . These were significant departures in form from the true position and substantial errors in substance, since Products did not manufacture the goods and could only be liable under the (No. 2) Act . In the circumstances, in our view, the provisions of s. 12B(1)(c) were not complied with.''
In my opinion, Magna Stic may be distinguished for our purposes. There the difference that existed was between two statutes. Here we are concerned with a single statute only. It was plain, as the notice said, that the Commissioner was altering the sale value. Although not, strictly speaking, a ``determination'' of sale value under s. 18A(4), any error was, I think, of such a formal character and of such limited dimensions that it could safely be ignored under the falsa demonstratio principle.
In the
Wingadee
case, above, a rate notice served on 28 September stated that at the expiration of 30 days from service the rates would be payable, but added: ``the day on which such rates will be due and payable will be therefore 28 October''. The High Court held that the fact that the rates were not payable until 29 October did not render the notice invalid. In the present case, as has been noted and as Hill J. observed in
Darrell Lea Chocolate Shops Pty Ltd
v
FC of T
95 ATC 4301
(at 4305)
: ``Liability to sales tax was not dependent upon assessment. It arose independently of that assessment''. Moreover, the notice of assessment was not conclusive of the substantive issue now in question. The policy of the legislation, as with income tax, is that ``the taxpayer is given a full opportunity of contesting the liability to tax in proceedings under
[
the legislation]'' (per Hill J. in
Darrell Lea
, above, at 4304-4305).
The notice made it clear that the Commissioner had determined that the sale value be altered to the extent there mentioned. That was the fundamental consideration and this information was then communicated to the taxpayer. In these circumstances, the erroneous reference to s. 25(2) in the notice could, in my view, be disregarded. I agree with the Tribunal's conclusion on this point.
(f) Additional tax
In the circumstances, it is not necessary that I express an opinion on this question.
The cross-appeal
For similar reasons, it is also not necessary that I deal with this.
Costs
Since each side has succeeded, and failed, on one of the two main arguments dealt with, I propose that there be no order for costs.
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